Newcastle Building Society has brought out a third issue of the capital safe bond, a guaranteed equity bond that is linked to the FTSE 100, S&P 500 and Eurostoxx 50 indices.
Investors can choose either a three-year term or a five-year term. Both products return the original capital whatever happens to the indices. Looking at the five-year version in more detail, any return on top of the capital is capped at 85 per cent of the average growth in the indices.
To calculate the final return, the starting level of each index is recorded on July 5, 2002 for both versions. This is compared with the monthly average for each index during the final 12 months of term.
Skipton Building Society's guaranteed growth bond is linked to the same three indices as the five-year Newcastle bond but caps the growth above the capital return to 50 per cent of the increase in the indices. Although this is a lower than the 85 per cent offered by Newcastle, the Skipton Building Society guarantees a minimum return of 22 per cent. Newcastle's bond does not guarantee a minimum return.
Some investors may prioritise higher growth potential and would go for Newcastle's bond, while others may feel a guaranteed minimum return beyond the original capital. However, the Newcastle bond's use of 12 month averaging shields investors from erratic stockmarket performance during the early years of the term. In contrast, the Skipton bond monitors index levels on a single date each year, which could be a disadvantage if this coincides with a downward swing.